The Five Basics of Financial Literacy: What Everyone Should Know

Financial literacy is more than just balancing a checkbook or knowing how to save money—it’s about understanding the core principles that shape your financial future. Whether you’re a college student just starting out or well into your career, mastering the five basics of financial literacy can help you make confident, informed decisions throughout your life. Let’s break them down.

1. Credit and Debt: The Double-Edged Sword
Understanding how credit and debt work—for and against you—is one of the most important steps in personal finance. Credit can help you buy a home, start a business, or build a better financial reputation. But misused debt can quickly snowball into a long-term burden.

Debt is like any tool: useful when handled properly, but dangerous when ignored. Missing payments, for example, can significantly damage your credit score—and those missed payments can remain on your credit report for up to seven years.

Your credit score is a reflection of your borrowing and repayment habits. It’s used by lenders to determine your eligibility for mortgages, car loans, and credit cards. Even landlords and employers might review your score as part of their decision-making process.

2. Interest: Your Friend or Foe
Interest is the cost of borrowing money—but it’s also the reward for saving and investing it. When you borrow, interest works against you. When you save or invest wisely, interest can work for you—especially through the power of compound interest.

Compound interest means your money earns interest on the principal and on the interest it has already earned. Over time, this snowball effect can significantly increase your wealth—especially if you start early.

3. The Value of Time: Start Early, Stay Consistent
Time is one of your greatest financial allies. The earlier you begin saving or investing, the more time your money has to grow.
Take the hypothetical case of Cindy and Charlie:

Cindy invests $10,000 per year for 10 years starting immediately, then stops contributing.
Charlie waits 10 years, then begins investing $10,000 per year for 10 years.
Assuming a 6% rate of return, Cindy ends up with nearly double the amount Charlie has after 20 years. Why? Her money had more time to compound—even though she invested the same total amount.

4. Inflation: The Invisible Erosion
Inflation reduces the purchasing power of your money over time. That means the dollar you save today won’t go as far in the future unless your savings are growing to keep pace.

Keeping money in a safe is not a good long-term strategy. If inflation is at 2%, every $1 you stash away will only be worth $0.98 next year.
To beat inflation, it’s important to focus on your real rate of return—your return after subtracting inflation. For example, if your investment earned 6% but inflation was 1.5%, your real return was 4.5%.

5. Identity Theft and Financial Safety: Protect What’s Yours
In today’s digital world, protecting your personal information is essential to financial health. Identity theft can derail your credit, drain your accounts, and take years to recover from.

One easy way to protect yourself is to use a password manager, which helps you create and store strong, unique passwords for every site you use. A little digital diligence today can prevent serious headaches tomorrow.

Final Thoughts
Financial literacy isn’t about mastering Wall Street—it’s about gaining the knowledge and confidence to manage your money wisely. By understanding credit and debt, the power of interest, the importance of time, the effects of inflation, and how to protect your identity, you’re setting the stage for a secure and successful financial future.

Remember: The earlier you start, the stronger your foundation.

Disclosures:
This is a hypothetical example of mathematical compounding. It’s used for comparison purposes only and is not intended to represent the past or future performance of any investment. Taxes and investment costs were not considered in this example.
This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results.